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Single Member LLCs Personal Assets Vulnerable, Especially Regarding Payroll Tax Liabilities

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Single Member LLCs Personal Assets Vulnerable, Especially Regarding Payroll Tax Liabilities

Single Member LLCs Personal Assets Vulnerable, Especially Regarding Payroll Tax Liabilities

Single Member LLCs provide very little creditor protection for the owner’s personal assets; especially when it comes to payroll tax liabilities. 

Case in point, the McNamee v. Dept. of Treasury case involves a six-person accounting firm that was operated as a Single Member LLC.  The accounting firm failed to pay $64,736.18 in payroll taxes for tax years 2000 and 2001. The LLC ceased operations in March 2002. The IRS disregarded the LLC and imposed tax liens on the sole member’s personal property.  The accounting firm owner contested the government’s ability to disregard the entity. The District Court and the Second Circuit Court of Appeals rejected the owner’s arguments.

The accounting firm in this case could have prevented the IRS from pursuing the owner’s personal assets by simply having a nominal business partner (possibly having a corporation that was also owned by the sole LLC owner owning a 1% membership interest in the LLC) or possibly by electing to have the LLC treated as a corporation for federal tax purposes.

The moral of the story is legal/tax planning and understanding your personal liability.  Why an accounting firm of this size would continue to operate as a Sole Proprietorship is fodder for another article.

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